Sitting on their money

Investors, lendors wait out credit market mess

Steamboat Springs  At a discussion last week about growth in the Yampa Valley, it was, oddly enough, a comment about recession that drew the most attention.

"I guarantee you are going to have ruins," said Harry Frampton, managing partner with East West Partners.

Frampton was referring to Steamboat Springs development projects that may be abandoned due to the turmoil that has stricken credit markets worldwide in recent weeks. Coming from one of the most respected and successful developers in the West, it was a hard comment to ignore.

The sentiment was echoed just as confidently by Terry Minger, president and CEO of the Center for Resource Management. Minger and Frampton were leading a discussion entitled "The Present and Future Impacts of Resort Development on the Yampa Valley," the third installment in the "Dynamics of Growth in Resort Communities" series presented by a collection of local organizations.

Tom Leeson, Steamboat's planning director, said the comments sparked a discussion among city staff immediately following the presentation. The consensus reached there was that current projects in Steamboat and their financiers are strong enough to weather the storm.

"But it's certainly possible, and it's certainly happened in the past and could happen again," said Leeson, recalling a time in the 1980s when several projects were abandoned, leaving "construction paper flapping in the wind."

Local developers, bankers and Realtors agreed effects from the credit market mess would be felt locally - although on a less grand scale due to Steamboat's isolated and unique economy. Like Leeson, no one is predicting the abandonment of projects, but some projects may be slowed or future phases delayed, especially smaller developments that don't have their financing completely tied down.

If a project were to be abandoned, Leeson said, "there's probably someone else in line to pick up the project" because Steamboat's market is so hot. The situation is similar in the local housing market, where working-class people probably will have an increasingly hard time making purchases due to rising mortgage rates, while Steamboat's overall market is little affected.

Roots

The current credit crisis is mostly the result of trouble in the "subprime" mortgage market. Subprime mortgages are made to people who do not meet the traditional requirements for a loan; they may have poor credit, little or no down payment or the inability to document their income. Such loans were offered on a large scale in the early part of this decade, but as the national housing market has cooled and credit has tightened, delinquency rates and foreclosures have been on the rise.

As a result, lenders have had a harder time selling these loans to investors and financial institutions, which are demanding much higher premiums to account for the risk associated with rising default rates. In many cases, lenders have been forced to sell the loans at a loss.

The fallout has been widespread. American Home Mortgage, one of the U.S.'s largest lenders, has been forced out of business along with dozens of other lenders. As of Wednesday, mortgage giant Countrywide Financial was teetering on the brink of disaster, too. But there also have been consequences outside the mortgage industry. Markets in general have been falling. The Dow Jones Industrial Average has been on a roller-coaster ride and last week fell below 13,000 for the first time since April. Europe's sixth-largest bank, France's BNP Paribas, froze three investment funds because of losses related to U.S. housing loans.

Development

The overall tendency of lenders and investors to sit on their money in such a situation is what could lead to a deceleration in local development projects. Frampton said developers have a tendency to announce projects prematurely, sometimes before they have all the money required to finish the project.

"People will have a difficult time pooling those funds for a reasonable amount of time," Frampton said Wednesday.

Frampton used more measured words than his guarantee Monday, noting that his prediction was not based on any intimate knowledge of local projects.

"I'm not familiar, particularly, with any

developments in Steamboat," he said.

Local developer Jim Cook of Colorado Group Realty, a self-declared Frampton fan, did not contradict Frampton's assessment, but said all of his projects are continuing as planned.

"I think those projects that are heavily leveraged and that don't have a lot of equity in them will probably see some slow down," said Cook, whose three downtown developments will add roughly 50,000 square feet of commercial space in coming years.

Cook said that is not the case for his projects and many others in Steamboat.

"I think that most of our projects, certainly the ones I'm involved in, have strong financial commitments," he said.

The future, however, is less certain. Cook said investors likely will place more stringent demands on developers in the future. For example, investors might start requiring a higher ratio of pre-sold units in a development before committing. Cook said the unfavorable climate in credit markets is unfortunate for Steamboat. He said the city is posed to sustain growth for five to seven years, but is somewhat in a holding pattern while some wait for things to settle.

"Costs are a moving target right now," Cook said. "Until this credit mess works out, it could have the impact of slowing things down."

Steamboat developer Jon Peddie said being out of town has shown him how isolated Steamboat is from the rest of the nation when it comes to the trouble in the credit markets.

"In Steamboat you hear about it, but you don't read about it every day," Peddie said from southern California, where the problem is "front and center."

While less relevant in Steamboat, Peddie said he is very much paying attention to the issue. He said Steamboat has a "trickle-down economy," largely infused with money from outsiders who may be feeling the effects to a greater extent. Peddie said he will approach a development he has planned adjacent to Wildhorse Meadows with much more care as a result of the uncertainty in credit markets.

"We will sit down with partners and lenders for great length before deciding to pull the trigger," Peddie said.

Housing market

Steamboat so far has been immune to forces that have led to a downturn in the housing market nationally. Norbert Turek, a broker with Elk River Realty, said current conditions could turn the tide in Steamboat, but he doubts it.

"Workforce people are going to feel some pressure, and while that's an important part of our market, it's not a big-dollar part," Turek said.

Turek said Steamboat may feel some of the trickle-down effects Peddie mentioned, citing for an example a deal he has that is hinging on the buyer's sale of a home in Texas.

"Who knows what's happening in Texas," Turek said. "The push from other markets might be decreasing."

Turek said because of current credit conditions, there is virtually no opportunity for homebuyers doing marginal deals, which is bad news for middle- and working-class buyers, but not for the housing market as a whole.

"There's another buyer," Turek said.

Mike Larson, vice president of Mountain Valley Banking, said fallout from the credit market crunch already has hit Steamboat.

"It already has in the sense that a lot of the programs being offered have been restricted or curtailed," Larson said. "On top of that, rates have gone up."

While rates have gone up on some loans, Larson stressed that the standard, 30-year, fixed-rate mortgage has been unaffected. Among the products that have been eliminated are loan mortgages that required good credit and a large down payment but no requirement to prove income. Other mortgages have become more expensive, such as stated-income loans, which qualify a borrower using the income the borrower states on the application form - as opposed to the income the borrower can document. With a stated-income loan, the lender agrees not to attempt to verify the income the borrower states on the application.

Larson said the rates on such loans have increased from 7 percent to 8 percent in just a month. He said a 0.25 percent increase is usually considered large, let alone a full percentage point. These increases primarily affect those with marginal to average credit scores, Larson said, and therefore have less of an effect in Steamboat's affluent housing market.

"They don't affect near as large a percentage of our market as more blue-collar places," Larson said.

One factor that does apply particularly to a market such as Steamboat's is the rate jump on "jumbo mortgages." Jumbo mortgages are those for more than $417,000, and Larson said they make up "a significant portion of our market." They are perceived as more risky than standard mortgages - and thus have higher rates - because they are too large to be eligible for purchase and guarantee by U.S. government entities Fannie Mae and Freddie Mac.

Larson said the spread between these loans and standard mortgages usually is one-quarter to three-eighths of a percentage, but recently has jumped to three-quarters to a full percentage point. While that rise is expected to put downward pressure on prices in other areas, Larson said Steamboat's shortage of housing supply and strong demand will prevent that from happening here.

"That's just due to the quirks of our market," Larson said. "Rate swings don't significantly affect us locally."

What's to come

"My bet is the little scare the markets got will likely pass, but investors will probably be more conservative for the next year or two," Frampton said.

He said that in the end, that could end up being good news, since a more conservative approach to investments and lending practices would help prevent a similar credit crunch in the future.

John Kerst, president and CEO of First National Bank of Steamboat Springs, said his bank likely would tighten guidelines in the future. Despite what has happened in the rest of the country, Kerst said there has been no rise in delinquency in Steamboat and he expects the market turmoil to pass without too much incident.